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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________
Commission file number 0-14669
The Aristotle Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
27 Elm Street, New Haven, Connecticut
(Address of principal executive offices)
06-1165854
(I.R.S. Employer
Identification No.)
06510
(Zip Code)
Registrant's telephone number, including area code:
(203) 867-4090
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of September 8, 1999, the aggregate market value of the Common Stock
outstanding of The Aristotle Corporation held by nonaffiliates (without
admitting that any person whose shares are not included in such calculation is
an affiliate) was approximately $6,782,149, based on the closing price as
reported by the Nasdaq Stock Market.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement dated September 30, 1999 are
incorporated by reference into Part III of this Report on Form 10-K.
THE ARISTOTLE CORPORATION
TABLE OF CONTENTS
Selected Consolidated Financial Data...................................... 3
Management's Discussion and Analysis...................................... 5
Consolidated Financial Statements......................................... 13
2
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands, except share and per share data)
The following are selected consolidated financial data for The Aristotle
Corporation ("Aristotle"), Aristotle Sub, Inc. ("ASI"), and The Strouse, Adler
Company ("Strouse") on a consolidated basis for the fiscal years ended June 30,
1995, 1996, 1997 and 1998 and also include Simulaids, Inc. ("Simulaids") for the
fiscal year ended June 30, 1999. Aristotle formed ASI in 1993 and acquired
Strouse (the "Strouse Acquisition") in 1994. On January 2, 1998, ASI was merged
into Aristotle (the "ASI Merger"). On June 30, 1998, Aristotle consummated the
sale of substantially all of the assets and certain of the liabilities of
Strouse to Sara Lee Corporation (the "Strouse Sale"). On July 2, 1998, Strouse
changed its name to "S-A Subsidiary, Inc." On April 30, 1999, Aristotle acquired
all of the outstanding stock of Simulaids, a manufacturer of health and
education teaching aids. All references herein to the "Company" include
Aristotle, Strouse, ASI and Simulaids. The selected consolidated financial data
presented below should be read in conjunction with the Consolidated Financial
Statements of the Company, together with the Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.
FISCAL YEARS ENDED JUNE 30,
---------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
Consolidated statements of operations data:
Net sales ................................. $ -- $ -- $ -- $ -- $ 947
Costs and expenses:
Costs of goods sold ..................... -- -- -- -- 770
Selling, general and administrative ..... 589 609 649 685 1,289
Nonrecurring tax claim contingency fee .. -- -- -- 480 --
----------- ----------- ----------- ----------- -----------
Operating loss ........................ (589) (609) (649) (1,165) (1,112)
Other income (expense):
Investment and interest income .......... 321 312 146 151 725
Interest expense ........................ -- (4) (9) (5) (32)
----------- ----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes and
and minority interest ................... (268) (301) (512) (1,019) (419)
Benefit from (provision for) income
taxes (1) ............................... (25) 1,626 (32) 1,182 (89)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before minority interest ................ (293) 1,325 (544) 163 (508)
Minority interest ......................... 219 215 175 72 --
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations (512) 1,110 (719) 91 (508)
Discontinued operations:
Income (loss) from operations of
The Strouse Adler Company .............. (386) 358 732 624 --
Gain on sale of The Strouse, Adler Company -- -- -- 873 911
----------- ----------- ----------- ----------- -----------
Net income (loss) ...................... (898) 1,468 13 1,588 403
Preferred dividends ....................... -- -- -- 126 233
----------- ----------- ----------- ----------- -----------
Net income (loss) available to common
shareholders ......................... $ (898) $ 1,468 $ 13 $ 1,462 $ 170
=========== =========== =========== =========== ===========
Diluted earnings per common share:
Continuing operations ................... $ (0.47) $ 0.92 $ (0.65) $ (0.03) $ (0.60)
Discontinued operations ................. (0.36) 0.25 0.66 0.54 --
Gain on sale of discontinued operations . -- -- -- 0.75 0.74
----------- ----------- ----------- ----------- -----------
Net income .............................. $ (0.83) $ 1.17 $ 0.01 $ 1.26 $ 0.14
=========== =========== =========== =========== ===========
Weighted average shares outstanding ..... 1,085,757 1,440,274 1,100,700 1,151,920 1,226,144
Consolidated balance sheet data:
Total assets .............................. $ 26,820 $ 23,795 $ 20,381 $ 14,582 $ 18,485
Stockholders' equity ...................... 4,996 6,530 6,511 8,455 8,608
Long-term debt ............................ 10,274 2,097 1,670 -- 111
- ----------
(1) Income tax benefit for the year ended June 30, 1996 includes a $1,650
benefit related to the settlement of the Federal Deposit Insurance
Corporation's claims. Income tax benefit for the year ended June 30, 1998
includes a tax refund received resulting from a tax loss carryback claim.
3
SELECTED FINANCIAL DATA OF SIMULAIDS
(Amounts in thousands)
The following are selected financial data for Simulaids, on a stand alone
basis, for the fiscal years ended December 31, 1996, 1997 and 1998 and June 30,
1998 and 1999. The selected financial data for the fiscal years ended June 30,
1998 and 1999 have not been audited. The financial data is presented on a
historic basis of accounting and does not reflect adjustments resulting from the
acquisition or costs associated with the acquisition. The selected financial
data presented below should be read in conjunction with the Consolidated
Financial Statements of the Company, together with the Notes to Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report.
FISCAL YEARS ENDED FISCAL YEARS ENDED
DECEMBER 31, JUNE 30,
------------------ ------------------
(unaudited)
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
Consolidated statements of operations data (1):
Net sales ..................................... $ 5,625 $ 5,478 $ 5,860 $ 5,527 $ 5,820
Costs and expenses (2):
Costs of goods sold ......................... 3,259 2,965 3,266 3,121 3,259
Selling, general and administrative ......... 1,694 1,458 1,433 1,418 1,484
------- ------- ------- ------- -------
Operating income .......................... 672 1,055 1,161 988 1,077
Other income (expense):
Investment and interest income .............. 31 42 29 40 12
Interest expense (3) ........................ (21) (14) (13) (13) (12)
------- ------- ------- ------- -------
Income from continuing operations
Before income taxes ......................... 682 1,083 1,177 1,015 1,077
Benefit from (provision for) income taxes ..... (6) (8) (14) (9) (101)
------- ------- ------- ------- -------
Net income ................................ $ 676 $ 1,075 $ 1,163 $ 1,006 $ 976
======= ======= ======= ======= =======
Consolidated balance sheet data:
Total assets .................................. $ 2,700 $ 3,227 $ 3,213 $ 3,139 $ 3,058
Stockholders' equity .......................... 2,485 2,943 3,081 2,871 2,665
Long-term debt ................................ $ 128 $ 106 $ -- $ 96 $ 111
- ----------
(1) Operations data includes the Video Store business of Simulaids through
April 30, 1999 even though the Video Store business was not purchased by
Aristotle. The Video Store business and related assets were distributed to
the former stockholder of Simulaids on April 30, 1999.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
General
This discussion and analysis of financial condition and results of
operations will review the results of operations of the Company, on a
consolidated basis, for the fiscal year ended June 30, 1999, as compared to the
year ended June 30, 1998, and the fiscal year ended June 30, 1998, as compared
to the year ended June 30, 1997. This discussion and analysis of financial
condition and results of operations have been derived from, and should be read
in conjunction with, the Consolidated Financial Statements and Notes to
Consolidated Financial Statements contained elsewhere in this report.
On April 30, 1999, Aristotle acquired all of the outstanding stock
of Simulaids, Inc. ("Simulaids"), a manufacturer of health and education
teaching aids. Simulaids is currently Aristotle's only operating subsidiary.
Results of Continuing Operations of the Company
Fiscal Year Ended June 30, 1999 as Compared to the Year Ended June 30,
1998
The Company's net sales of $947,000 for the fiscal year ended June
30, 1999 represents the net sales of Simulaids for the two months ended June 30,
1999.
Gross profit for the current fiscal year of $177,000 represents the
operations of Simulaids for the two months ended June 30, 1999. The gross margin
reflects a nonrecurring impact of the application of purchase accounting at the
date of the acquisition which resulted in a $259,000 fair value adjustment to
the purchased inventory. This purchase accounting adjustment was expensed in the
period ended June 30, 1999 as the corresponding inventory was sold.
The Company's selling, general and administrative expenses for the
fiscal year ended June 30, 1999 increased 88% to $1,289,000 compared to $685,000
for the prior fiscal year. The increase was primarily due to the operating
expenses of Simulaids of $227,000 for the two months ended June 30, 1999,
increased professional fees primarily incurred in connection with tax matters
and potential acquisitions, and increases in administrative and directors'
compensation.
The Company incurred a contingency fee of $480,000 for the fiscal
year ended June 30, 1998 which resulted from an agreement entered into in
connection with the income tax refund received during the fiscal year ended June
30, 1998. See the income tax discussion below.
Investment and interest income was $725,000 and $151,000 for the
twelve months ended June 30, 1999 and 1998, respectively. The increase in 1999
mainly reflects the additional investment and interest income generated from the
proceeds of the Strouse Sale in June 1998. The income for the twelve months
ended June 30, 1999 and 1998 was principally generated by short-term cash
investments and corporate bonds.
Interest expense for the twelve months ended June 30, 1999 increased
to $32,000 from $5,000 in the corresponding twelve months ended June 30, 1998.
The increase reflected interest expense on the bank funds utilized in the
acquisition of Simulaids.
The income tax provision for the twelve months ended June 30, 1999
was $89,000 compared to a benefit of $1,182,000 for the twelve months ended June
5
30, 1998. During the twelve months ended June 30, 1999, the Company recorded a
tax provision related to state taxes. During the twelve months ended June 30,
1998, the Company received a tax refund of $1,919,000 resulting from a tax loss
carryback claim related to its 1996 tax year. In connection therewith, the
Company recorded an income tax benefit of $1,199,000, which is net of a $720,000
reserve which is included in accrued expenses in the accompanying consolidated
balance sheet, less minimum state provisions.
Minority interest expense of $72,000 for the twelve months ended
June 30, 1998 was due to preferred dividends paid or accrued on outstanding
minority interest Preferred Stock issued to the Former Strouse Stockholders in
connection with the Strouse Acquisition. In January 1998, the minority interest
Preferred Stock was converted into Series F, G and H Aristotle Preferred Stock.
Preferred dividends were $233,000 for the twelve months ended June
30, 1999 compared to $126,000 for the twelve months ended June 30, 1998. The
increase was principally due to the payments of dividends for the Series E
Aristotle Preferred Stock for the entire 1999 fiscal year versus for half of the
1998 fiscal year. Preferred dividends represent dividends paid or accrued during
the twelve months on outstanding Series E, F, G and H Aristotle Preferred Stock.
The Series E Aristotle Preferred Stock was issued in connection with the
Preferred Stock Purchase Agreement between the Company and Geneve Corporation
(the "Preferred Stock Purchase Agreement"). The Series F, G and H Aristotle
Preferred Stock was issued in connection with the original acquisition of
Strouse.
Results of Discontinued Operations of the Company
Fiscal Year Ended June 30, 1999 as Compared to the Year Ended June 30,
1998
Income from the operations of The Strouse, Adler Company was
$624,000 for the twelve months ended June 30, 1998 reflecting the performance of
the business during the year before the sale in June 1998.
Gain on the sale of Strouse of $911,000 for the year ended June 30,
1999 reflects adjustments which resulted from a $48,000 charge related to a
final purchase price adjustment based on the net book value of net assets
acquired by Sara Lee, a $41,000 charge related to additional transaction costs
in excess of management's original estimate and $1,000,000 of additional gain
resulting from the final determination of the ultimate tax obligations resulting
from the sale. The gain of $873,000 recorded in the year ended June 30, 1998
reflected gross proceeds of $21,500,000 offset by the net book value of acquired
assets and liabilities of $18,397,000 and estimated taxes and transaction costs
of $2,230,000.
Results of Continuing Operations of the Company
Fiscal Year Ended June 30, 1998 as Compared to the Year Ended June 30,
1997
The Company's general and administrative expenses for the fiscal
year ended June 30, 1998 increased 6% to $685,000 compared to $649,000 for the
prior fiscal year. The increase was primarily due to increased directors'
compensation.
The Company incurred a contingency fee of $480,000 for the fiscal
year ended June 30, 1998 which resulted from an agreement entered into in
connection with the income tax refund received during the fiscal year ended June
30, 1998. See the income tax discussion below.
Investment and interest income was $151,000 and $146,000 for the
twelve months ended June 30, 1998 and 1997, respectively. The income for the
twelve months ended June 30, 1998 and 1997 was principally generated by
short-term cash investments, restricted and unrestricted long-term investments
in corporate bonds and the investment of funds held in the Strouse Escrow
Account that was established in
6
connection with the Strouse Acquisition and was subject to an escrow and pledge
agreement with the Former Strouse Stockholders.
Interest expense for the twelve months ended June 30, 1998 decreased
to $5,000 from $9,000 in the corresponding twelve months ended June 30, 1997.
The interest was generated by borrowings on a line of credit agreement that bore
interest at the prime rate. The balance was paid in January 1998 and the
agreement was terminated on August 31, 1998.
The income tax benefit for the twelve months ended June 30, 1998 was
$1,182,000 compared to a provision of $32,000 for the twelve months ended June
30, 1997. During the twelve months ended June 30, 1998, the Company received a
tax refund of $1,919,000 resulting from a tax loss carryback claim related to
its 1996 tax year. In connection therewith, the Company recorded an income tax
benefit of $1,199,000, which is net of a $720,000 reserve which is included in
accrued expenses in the accompanying consolidated balance sheet. In addition,
during the twelve months ended June 30, 1998, the Company recorded a minimum
state tax provision. The income tax provision for the twelve months ended June
30, 1997, reflected minimum state taxes as any federal tax obligation was
sheltered by the utilization of net operating loss carryforwards.
Minority interest expense was $72,000 and $175,000 for the twelve
months ended June 30, 1998 and 1997, respectively. The minority interest expense
was due to preferred dividends paid or accrued on outstanding minority interest
Preferred Stock issued to the former Strouse Stockholders in connection with the
Strouse Acquisition. In January 1998, the minority interest Preferred Stock was
converted into Series F, G and H Aristotle Preferred Stock.
Preferred dividends were $126,000 for the twelve months ended June
30, 1998. Preferred dividends represent dividends paid or accrued during the
twelve months on outstanding Series E, F, G and H Aristotle Preferred Stock. The
Series E Aristotle Preferred Stock was issued in connection with the Preferred
Stock Purchase Agreement. The Series F, G and H Aristotle Preferred Stock was
issued in connection with the original acquisition of Strouse.
Results of Discontinued Operations of the Company
Fiscal Year Ended June 30, 1998 as Compared to the Year Ended June 30,
1997
Income from the operations of Strouse was $624,000 for the twelve
months ended June 30, 1998 versus $732,000 for the twelve months ended June 30,
1997. The decrease of $108,000 was primarily due to a 31% increase in selling
costs partially offset by the increased gross profit generated by a 22% net
sales increase. The selling cost increase reflected increased investment
spending in advertising and merchandising to support current and future business
growth.
Gain on the sale of Strouse of $873,000 reflected gross proceeds of
$21,500,000 offset by the net book value of Strouse assets and liabilities of
$18,397,000 and estimated taxes and transaction costs of $2,230,000.
Results of Operations of Simulaids, on a stand alone basis
Twelve Months Ended June 30, 1999 as Compared to the Twelve Months Ended
June 30, 1998
Simulaids' net sales for the twelve months ended June 30, 1999
increased 5.3% to $5,820,000, compared to net sales of $5,527,000 for the prior
year.
7
Simulaids' gross profit for the twelve months ended June 30, 1999
increased to $2,561,000 from $2,406,000 for the prior year, and the gross margin
percentage increased to 44.0% from 43.5%. The increase in gross profit was
principally due to the sales increase and the increase in the gross margin
percentage was principally a result of increased efficiencies resulting from the
increased level of production.
Operating expenses include selling, general and administrative, and
product development expenses. Operating expenses for the twelve months ended
June 30, 1999 were $1,484,000 versus $1,418,000 for the twelve months ended June
30, 1998. The $66,000, or 4.7%, increase was principally a result of increases
in administrative compensation.
Investment and interest income was $12,000 and $40,000 for the
twelve months ended June 30, 1999 and 1998, respectively. Fluctuations in
investment and interest income generated each year were a direct result of the
cash balances maintained in the business.
Interest expense for the twelve months ended June 30, 1999 decreased
to $12,000 from $13,000 in the prior year. The decrease in interest expense
primarily resulted from reduced borrowing levels under a mortgage loan.
The provision for income taxes for the twelve months ended June 30,
1999 was $101,000 which reflected state taxes on income.
Liquidity and Capital Resources
Aristotle ended the June 30, 1999 fiscal year with $5,849,000 in
cash and cash equivalents. Cash consumed during the year was principally used
for the acquisition of Simulaids, the purchase of marketable securities and the
payment of Strouse transaction costs from the June 1998 sale which were accrued
in fiscal 1998 and paid in fiscal 1999. The overall decrease in cash and cash
equivalents of $6,422,000 is detailed below.
The Company used cash of $767,000 in operations during the fiscal
year ended June 30, 1999 and used cash of $1,174,000 in operations for the
fiscal year ended June 30, 1998. During fiscal 1999, the use of cash from
operations was principally the result of a loss from continuing operations of
$508,000 and the overpayment of refundable taxes of $1,150,000 partially offset
by reductions in other assets of $476,000 and inventories of $203,000. During
fiscal 1998, the utilization of cash in operations was principally the result of
an increase in inventories and a decrease in accounts payable partially offset
by the income generated by operations, depreciation and amortization and an
increase in accrued tax reserves.
The Company used $10,558,000 in investing activities for the fiscal
year ended June 30, 1999 and generated $10,957,000 from investing activities for
the Company in the fiscal year ended June 30, 1998. During fiscal 1999, the
utilization of cash was principally for the acquisition of Simulaids, the
purchase of marketable securities and the payment of Strouse transaction costs
resulting from the June 1998 sale. . During fiscal 1998, the generation of cash
was primarily provided from proceeds of the Strouse Sale and proceeds from the
sale of the Series E Preferred Stock partially offset by the redemption of
minority interest Preferred Stock.
Financing activities provided cash of $4,903,000 for the Company for
the fiscal year ended June 30, 1999 and provided cash of $2,349,000 for the
fiscal year ended June 30, 1998. Funds generated in fiscal 1999 were primarily
due to the short-term bank borrowings of $5,000,000 partially offset by
8
preferred dividends of $233,000. Funds provided in fiscal 1998 were generated
from borrowings under the line of credit and were used to fund the working
capital needs of Strouse.
Capital resources in the future are expected to be used in the
development of the Simulaids business and to acquire additional companies in the
health and medical education field. Other potential uses of cash relate to: (1)
Series F, G, and H Preferred Stock which have put rights to redeem shares
aggregating $799,000; and (2) Series E Preferred Stock which have put rights to
redeem shares aggregating $2,250,000 on January 1, 2002. In the meantime,
Aristotle anticipates that there will be sufficient financial resources to meet
Aristotle's projected working capital and other cash requirements for the next
twelve months.
Recent Developments
On May 3, 1999, the Company entered into a $5,000,000 revolving loan
agreement with Citizens Bank to finance the acquisition of Simulaids. Borrowings
under the revolving loan agreement bore interest at 7%. As of June 30, 1999, the
maturity date of this revolving loan agreement was extended to August 31, 1999.
Subsequent to year end, the Company repaid $3,000,000 of the revolving loan and
refinanced the remaining $2,000,000 into a seven year term note bearing interest
at 7.7% per annum.
Income Taxes
At June 30, 1999, Aristotle had $51,800,000 of federal net operating
loss carryforwards which expire through 2011 and $1,000,000 of state net
operating loss carryforwards which expire through 2001.
In September, 1996, the Company filed an amended Federal income tax
return for the year ending December 31, 1992 claiming a worthless stock
deduction of approximately $54,000,000 with respect to its stock in the First
Constitution Bank (the "Bank") which previously was Aristotle's only subsidiary
and which, on October 2, 1992, was seized by the FDIC. As a result of such
amended return, the Company has also claimed tax refunds of approximately
$10,000,000 resulting from the carryback of the Company's net operating loss
from 1992 to prior years. Pending final review by the Internal Revenue Service,
the Company has not recorded the $10,000,000 refund claim in its consolidated
financial statements. After consideration of such carryback claim, the Company's
remaining Federal net operating loss carryforward related to the worthless stock
deduction would be approximately $32,000,000 and the Company's aggregate Federal
net operating loss carryforwards would be reduced from $51,800,000 to
$29,800,000.
During 1997, the Company filed a carryback claim related to its 1996
tax year. In connection therewith, the Company received $1,919,000 for which the
Company recorded an income tax benefit of $1,199,000, which is net of a $720,000
reserve. In addition, upon receipt of such refund, the Company was obligated to
pay $480,000 as a result of a contingent fee arrangement entered into in
connection with this income tax refund claim.
On its return for 1992 as originally filed, the Company made
elections under provisions set forth in regulations proposed by the Internal
Revenue Service in April 1992 as guidance for the application of Section 597 of
the Internal Revenue Code of 1986, as amended and under Section 1.1502-20(g)(1)
of the Federal Income Tax Regulations to (i) disaffiliate from the former Bank
for Federal income tax purposes and (ii) reattribute net operating losses of the
former Bank in excess of $81,000,000 to the Company. The application of the tax
law with respect to the Company's election to disaffiliate from the former Bank
and to reattribute the former Bank's net operating losses to the Company is not
certain and, therefore, there is no assurance that the Company could succeed to
any of the former Bank's net operating losses. Moreover,
9
the reattribution to the Company of the former Bank's net operating losses may
be limited if the position taken by the Company on its amended returns is
allowed.
The field examination by the Internal Revenue Service of the
Company's 1992 and 1996 amended returns and the two above-noted carryback claims
is nearing completion and the Company anticipates that the Internal Revenue will
disallow the two claims. However, this disallowance at the field examination
level was not unexpected by the Company. The Company and its advisors continue
to believe the claims have merit and, therefore, the Company will continue to
pursue its case at the Internal Revenue Service Appellate level. The ultimate
outcome of this proceeding is uncertain at this time. Notwithstanding, the
Company being entitled to a net operating loss carryforward arising from, or
with respect to its interest in, the former Bank, its ability to utilize such
carryforward is dependent upon many factors including (i) the realization of
taxable income by the Company, and (ii) avoiding a fifty percent "ownership
change" as defined in Section 382 of the Internal Revenue Code. If there is an
"ownership change", the tax loss carryforwards available to the Company would be
significantly reduced or eliminated. Accordingly, neither the refund claim nor
the future benefit of these remaining net operating loss carryforwards have been
reflected as tax assets in the accompanying consolidated financial statements.
The Company believes, assuming that the Former Strouse Stockholders
currently own the maximum number of shares of Common Stock of Aristotle they
could acquire through the exercise of their various rights and options in the
Strouse Acquisition and that Geneve Corporation currently own the maximum number
of shares of Common Stock of Aristotle it could acquire through the conversion
of the Series E Preferred Stock, that the Company has not undergone an ownership
change within the meaning of Section 382 of the Code. During the period which
the Company has an unutilized federal net operating loss carryforward, which may
be for many years into the future, particularly if the Company does succeed to a
significant portion of the former Bank's net operating loss carryforward, it
will be necessary for the Company to determine whether an ownership change has
occurred each time a new or existing stockholder becomes a 5% stockholder or an
existing 5% stockholder increases its ownership interest. Except with respect to
the Former Strouse Stockholders and Geneve Corporation, the Company does not
know of any stockholders who currently own or would own, upon the exercise of
options or warrants, 5% or more of the Common Stock. At a special meeting of
stockholders held on April 8, 1994, the stockholders voted to restrict certain
share transfers because they could affect the Company's ability to use its net
operating losses under Section 382.
Quantitative & Qualitative Disclosures About Market Risk
As described below, credit risk and interest rate risk are the
primary sources of market risk to the Company in its marketable securities and
short-term borrowings.
Qualitative
Interest Rate Risk: Changes in interest rates can potentially impact
the Company's profitability and its ability to realize assets and satisfy
liabilities. Interest rate risk is resident primarily in the Company's
marketable securities and short-term borrowings which have fixed coupon or
interest rates.
Credit Risk: The Company's marketable securities are invested in
investment grade corporate bonds and closed-end bond funds, both domestic and
international, which have various maturities.
Quantitative
10
The Company's marketable securities and short-term borrowings as of June 30,
1999 are as follows:
Maturity less Maturity greater
than one year than one year
------------- ----------------
Marketable securities held in escrow
Cost value $ 157 $ 574
Weighted average return 4.7% 6.9%
Fair market value $ 157 $ 552
Marketable securities
Cost value $ 720 $1,507
Weighted average return 7.5% 7.4%
Fair market value $ 702 $1,386
Short-term borrowings
Amount $5,000 $ --
Weighted average interest rate 7.0% --
Fair market value $5,000 $ --
Year 2000 Issue
The Year 2000 Issue is essentially the result of computer programs
being written using two digits rather than four to define the year. Any of the
Company's information technology ("IT") systems that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a system failure or miscalculation causing disruption
of operations; including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The problem has the potential to affect "non-IT" systems, that is, operating and
control systems that rely on embedded microprocessors. Embedded microprocessors
have interfaces that are inaccessible to the user and which may contain a date
function that could trigger a malfunction. In addition, like every other
business enterprise, the Company is at risk from Year 2000 Issue failures on the
part of its major business counterparts, including suppliers, distributors, and
customers, as well as potential failures in public and private infrastructure
services, including electricity, water, gas, communications, and financial
services. System failures could adversely affect operations and financial
results throughout the Company.
The Company completed its Year 2000 conversion project. In addition,
the Company has initiated formal communications with its significant suppliers,
customers, and critical business partners to determine the extent to which the
Company may be vulnerable in the event those parties fail to properly remediate
their own Year 2000 Issues. While the Company is not presently aware of any such
significant exposure, there can be no guarantee that the systems of third
parties on which the Company relies will be converted in a timely manner, or
that a failure to properly convert by another company would not have a material
adverse effect on the Company.
The Company also relies, both domestically and internationally, upon
government agencies, utility companies, telecommunications services, and other
service providers outside the Company's control. There is no assurance that such
suppliers, governmental agencies, or other third parties will not suffer Year
2000 business disruption. Such failures could have a material adverse effect on
the Company's financial conditional and results of operations.
11
The Company does not have a contingency plan. The Company may
periodically revise its Year 2000 plans as new information is learned. In
addition, this description of the Company's efforts involves estimates and
projections of future events and activities. These estimates and projections are
subject to change as work continues, and such changes could be substantial.
Certain Factors That May Affect Future Results of Operations
Aristotle believes that this report may contain forward-looking
statements within the meaning of the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include statements regarding Aristotle's liquidity and are based on management's
current expectations and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in the
forward-looking statements. Aristotle cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including, but not limited to, the following: (i) the
ability of Aristotle to obtain financing and additional capital to fund its
business strategy on acceptable terms, if at all; (ii) the ability of Aristotle
on a timely basis to find, prudently negotiate and consummate one or more
additional acquisitions; (iii) the ability of Aristotle to retain and take
advantage of its net operating tax loss carryforward position; (iv) Aristotle's
ability to manage Simulaids and any other acquired or to be acquired companies;
and (v) general economic conditions. As a result, Aristotle's future development
efforts and operations involve a high degree of risk. For further information,
refer to the more specific risks and uncertainties discussed throughout this
report.
12
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND 1998
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Aristotle Corporation:
We have audited the accompanying consolidated balance sheets of The Aristotle
Corporation (a Delaware corporation) and subsidiaries as of June 30, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years ended June 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Aristotle Corporation and
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years ended June 30, 1999 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Hartford, Connecticut
September 13, 1999
14
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND 1998
(dollars in thousands, except for share data)
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 5,849 $ 12,271
Marketable securities 702 202
Marketable securities and cash equivalents held
in escrow, at market value 157 600
Accounts receivable 299 --
Current maturities of notes receivable 102 208
Inventories 989 --
Tax receivable 1,150 --
Other current assets 85 360
--------- ---------
Total current assets 9,333 13,641
--------- ---------
Property and equipment, net 1,478 4
--------- ---------
Other assets:
Marketable securities, at market value 1,386 867
Marketable securities held in escrow, at
market value 552 --
Goodwill, net of amortization of $39 in 1999 5,685 --
Other noncurrent assets 51 70
--------- ---------
7,674 937
--------- ---------
$ 18,485 $ 14,582
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 5,000 $ --
Current maturities of capital lease obligations 25 --
Current maturities of Series F, G and H
Preferred Stock 799 805
Accounts payable 143 --
Accrued expenses 829 648
Accrued transaction costs -- 1,704
Accrued tax reserves 720 720
--------- ---------
Total current liabilities 7,516 3,877
--------- ---------
Capital lease obligations, net of current
maturities 111 --
--------- ---------
Commitments and contingencies
Series E Redeemable Preferred Stock 2,250 2,250
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares
authorized, 1,240,727 and 1,209,027 shares
issued in 1999 and 1998 13 11
Additional paid-in capital 160,403 160,248
Retained earnings (deficit) (151,600) (151,770)
Treasury stock, at cost, 7,609 shares and
7,287 shares in 1999 and 1998, respectively (47) (30)
Net unrealized investment losses (161) (4)
--------- ---------
Total stockholders' equity 8,608 8,455
--------- ---------
$ 18,485 $ 14,582
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
15
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(dollars in thousands, except per share data)
1999 1998 1997
------- ------- -----
Net sales $ 947 $ -- $ --
Cost of goods sold 770 -- --
------- ------- -----
Gross profit 177 -- --
------- ------- -----
Selling expenses 46 -- --
General and administrative expenses 1,243 685 649
Nonrecurring tax claim contingency
fee -- 480 --
------- ------- -----
Operating loss (1,112) (1,165) (649)
------- ------- -----
Other income (expense):
Investment and interest income 725 151 146
Interest expense (32) (5) (9)
------- ------- -----
Loss from continuing
operations before income
taxes and minority interest (419) (1,019) (512)
Provision for (benefit from) income
taxes 89 (1,182) 32
------- ------- -----
Income (loss) from continuing
operations before minority
interest (508) 163 (544)
Minority interest -- 72 175
------- ------- -----
Income (loss) from continuing
operations (508) 91 (719)
Discontinued operations:
Income from operations of The Strouse,
Adler Company -- 624 732
Gain on sale of The Strouse,
Adler Company 911 873 --
------- ------- -----
Net income 403 1,588 13
Preferred dividends 233 126 --
------- ------- -----
Net income applicable to
common shareholders $ 170 $ 1,462 $ 13
======= ======= =====
Basic earnings per common share:
Continuing operations $ (.60) $ (.03) $(.65)
Discontinued operations -- .54 .66
Gain on sale of discontinued
operations .74 .75 --
------- ------- -----
Net income $ .14 $ 1.26 $ .01
======= ======= =====
Diluted earnings per common share:
Continuing operations $ (.60) $ (.03) $(.65)
Discontinued operations -- .54 .66
Gain on sale of discontinued
operations .74 .75 --
------- ------- -----
Net income $ .14 $ 1.26 $ .01
======= ======= =====
The accompanying notes are an integral part of
these consolidated financial statements.
16
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(dollars in thousands)
Net
Unrealized Total
Additional Retained Investment Changes in
Common Paid-in Earnings Treasury Gains Stockholders' Comprehensive
Stock Capital (Deficit) Stock (Losses) Equity Income
----- ------- --------- ----- -------- ------ ------
Balance, June 30, 1996 $ 11 $159,762 $(153,245) $ (8) $ 10 $ 6,530
Net income -- -- 13 -- -- 13 $ 13
Net unrealized investment loss -- -- -- -- (10) (10) (10)
-------
Comprehensive income -- -- -- -- -- -- $ 3
=======
Purchase of treasury stock -- -- -- (22) -- (22)
----- -------- --------- ----- ----- -------
Balance, June 30, 1997 11 159,762 (153,232) (30) -- 6,511
Net income -- -- 1,588 -- -- 1,588 $ 1,588
Preferred dividends -- -- (126) -- -- (126) --
Net unrealized investment loss -- -- -- -- (4) (4) (4)
-------
Comprehensive income -- -- -- -- -- -- $ 1,584
=======
Sale of common stock -- 135 -- -- -- 135
Conversion of ASI common stock -- 215 -- -- -- 215
Issuance of common stock to
directors -- 136 -- -- -- 136
----- -------- --------- ----- ----- -------
Balance, June 30, 1998 11 160,248 (151,770) (30) (4) 8,455
Net income -- -- 403 -- -- 403 $ 403
Preferred dividends -- -- (233) -- -- (233) --
Net unrealized investment loss -- -- -- -- (157) (157) (157)
-------
Comprehensive income -- -- -- -- -- -- $ 246
=======
Issuance of common stock to
directors 2 155 -- -- -- 157
Purchase of treasury stock -- -- -- (17) -- (17)
----- -------- --------- ----- ----- -------
Balance, June 30, 1999 $ 13 $160,403 $(151,600) $ (47) $(161) $ 8,608
===== ======== ========= ===== ===== =======
The accompanying notes are an integral part of
these consolidated financial statements.
17
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(dollars in thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 403 $ 1,588 $ 13
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Gain from sale of discontinued operations (911) (873) --
Depreciation and amortization 59 574 528
Issuance of stock for services -- 136 --
Loss on disposal of property and equipment 9 -- --
Changes in assets and liabilities, net of
business acquired:
Accounts receivable 92 (23) (685)
Inventories 203 (2,850) (1,467)
Tax receivable (1,150) -- --
Other assets 476 1 263
Accounts payable 64 (757) 1,291
Accrued expenses (12) 310 (402)
Accrued tax reserves -- 720 --
-------- -------- -------
Net cash provided by (used
in) operating activities (767) (1,174) (459)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (1,285) (1,069) (707)
Sale of marketable securities -- 600 5,760
Settlement of FDIC claim -- -- (3,760)
Repurchase of minority interest Preferred Stock -- (800) (530)
Proceeds from sale of Series E Preferred Stock -- 2,250 --
Sale of common stock -- 135 --
Minority interest -- 21 12
Proceeds from disposal of discontinued operations 911 8,724 --
Accrued transaction costs (1,704) 1,704 --
Purchase of property and equipment (17) (608) (260)
Purchase of Simulaids, net of $237 of
cash acquired (8,463) -- --
-------- -------- -------
Net cash provided by (used
in) investing activities (10,558) 10,957 515
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under
line of credit -- 2,424 799
Proceeds from short-term borrowings 5,000 -- --
Repayment of capital lease obligations (4) -- --
Principal debt payments -- (75) (793)
Purchase of treasury stock (17) -- (22)
Proceeds from exercise of stock options 157 -- --
Payment of dividends on preferred stock (233) -- --
-------- -------- -------
Net cash provided by (used in)
financing activities 4,903 2,349 (16)
-------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,422) 12,132 40
CASH AND CASH EQUIVALENTS, beginning of period 12,271 139 99
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of period $ 5,849 $ 12,271 $ 139
======== ======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 28 $ 901 $ 637
======== ======== =======
Income taxes $ 1,259 $ 56 $ 44
======== ======== =======
The accompanying notes are an integral part of
these consolidated financial statements.
18
THE ARISTOTLE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(dollars in thousands, except share and per share data)
1. Nature of Operations:
Organization -
The Aristotle Corporation (Aristotle or the Company) is a holding company
which, through one operating subsidiary, currently conducts business in
one segment; the health and medical educational products market.
Acquisition of Simulaids, Inc. -
Effective April 30, 1999, pursuant to a Stock Purchase Agreement dated as
of April 30, 1999, Aristotle acquired all of the outstanding stock (the
Acquisition) of Simulaids, Inc. (Simulaids), a privately-held New York
corporation. As a result, the Company's 1999 consolidated statement of
operations includes the results of operations of Simulaids since the date
of the Acquisition.
Simulaids, located in Woodstock, New York, manufactures health and medical
education teaching aids. Simulaids' proprietary products include manikins
and simulation kits used for training in the CPR, emergency rescue and
patient care fields. Simulaids' products are sold throughout the United
States and internationally via distributors and catalogues to end-users
such as fire and emergency medical departments and nursing and medical
schools.
The Acquisition purchase price of approximately $8,700, which includes
$300 of transaction and tax obligations resulting from the Acquisition,
was paid utilizing approximately $3,700 of cash and $5,000 of bank
financing. The fair value of assets acquired and liabilities assumed
amounted to $3,388 and $412, respectively. The excess cost over the fair
value of net assets acquired amounted to $5,724 and is reflected as
goodwill in the accompanying financial statements, net of amortization
based on a straight-line basis over 25 years.
The Acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets and liabilities acquired based on their fair market values at the
date of the Acquisition. The following summarizes the allocation of the
purchase price of Simulaids:
Cash $ 237
Accounts receivable 391
Inventories (Note 2) 1,192
Property, plant and equipment 1,486
Other assets 82
Goodwill 5,724
Accounts payable and accrued expenses (156)
Other liabilities (256)
------
$8,700
======
19
Operating results for the years ended June 30, 1999 and 1998 on a pro
forma basis, excluding the discontinued operations of the Strouse, Adler
Company, as though Simulaids was acquired as of July 1, 1998 are:
1999 1998
(Dollars in thousands (Dollars in thousands
except share data) except share data)
------------------ ------------------
(unaudited) (unaudited)
Net sales $5,820 $5,527
Net income (loss) from
continuing operations
available to common
shareholders (422) 39
Net income (loss) from
continuing operations
available to common
shareholders per
basic share $(.34) $.03
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results
that would have occurred had the Acquisition been consummated as of the
above dates, nor are they necessarily indicative of the future operating
results. The pro forma adjustments include amortization of intangibles,
decreased interest income, increased interest expense and state income
taxes on the income of Simulaids.
Sale of The Strouse, Adler Company -
Effective June 30, 1998, pursuant to an Asset Purchase Agreement dated as
of March 3, 1998 (the Purchase Agreement), Aristotle sold substantially
all of the assets and certain specified liabilities of its wholly-owned
subsidiary The Strouse, Adler Company (Strouse) to the Sara Lee
Corporation (Sara Lee) (the Strouse Sale). Strouse, which was Aristotle's
only operating subsidiary during fiscal 1998 and 1997, designed,
manufactured and marketed specialty bra and shapewear products. Aristotle
had originally acquired Strouse on April 11, 1994 for an aggregate
purchase price of $5,990 (the Strouse Acquisition).
The final consideration received by Aristotle from Sara Lee was $21,452.
Included in the $21,452 aggregate purchase price was a $5,000 payment as
consideration for Aristotle agreeing not to compete in the business of
manufacturing, marketing, distributing and selling women's intimate
apparel.
Aristotle recognized a net gain on the Strouse Sale of approximately
$1,784 calculated as follows:
Proceeds $ 21,452
Net book value of acquired assets and
liabilities related to and
resulting from the operation of Strouse (18,397)
Estimated taxes and transaction costs (1,271)
--------
Gain on sale of discontinued operation $ 1,784
========
20
During the year ended June 30, 1999, Aristotle recorded adjustments
aggregating $911 which increased the gain on the sale of Strouse. The $911
adjustments resulted from a $48 charge related to a final purchase price
adjustment based on the net book value of net assets acquired by Sara Lee,
as defined and as provided for in the Purchase Agreement; a $41 charge
related to additional transaction costs in excess of management's original
estimate and $1,000 of additional gain resulting from the final
determination of the ultimate tax obligations resulting from the sale. As
a result of these final adjustments, the ultimate gain recognized by the
Company in connection with the Strouse Sales was $1,784, of which a gain
of $873 was recorded in fiscal 1998 and a gain of $911 was recorded in
fiscal 1999. The estimated net cash proceeds to Aristotle resulting from
the Strouse Sale is as follows:
Gross proceeds $ 21,452
Payment of Strouse obligations not
assumed by Sara Lee, including payment
of Strouse bank debt of $10,455 (10,546)
Payment of taxes and transaction costs (1,271)
--------
Net proceeds from sale of discontinued
operation $ 9,635
========
The results of Strouse prior to the sale have been classified as
Discontinued Operations in the accompanying consolidated financial
statements. Revenues generated from Strouse operations were $26,645 and
$21,847 for the years ended June 30, 1998 and 1997, respectively.
2. Significant Accounting Policies:
Principles of consolidation -
The consolidated financial statements include the accounts of Aristotle
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Revenue recognition -
Revenue is recorded at the time of shipment.
Cash and cash equivalents -
Cash and cash equivalents include cash and highly liquid investments with
an original maturity of three months or less.
Inventories -
Inventories were valued at the lower of cost, using the first-in,
first-out method (FIFO), or market.
21
At June 30, 1999, inventories consisted of the following:
Raw materials $296
Work-in-process 119
Finished goods 574
----
$989
====
In connection with the Acquisition (see Note 1), and in accordance with
the purchase method of accounting, at the date of acquisition the
purchased inventories were valued at a fair value which was approximately
$259 greater than its historic cost. This purchase accounting adjustment
was expensed as the associated inventories were sold and is therefore
included in cost of sales in the accompanying 1999 consolidated statement
of operations.
Notes receivable -
Notes receivable relates to loans from Aristotle to the former
stockholders of Strouse. The loans bear interest at 8.9% per annum. During
fiscal 1999 and 1998, certain former Strouse shareholders surrendered 616
and 10,000 shares of Series F, G & H Preferred Stock (see Note 6) in
exchange for the cancellation of $6 and $100, respectively, of loans.
Property and equipment -
Property and equipment are recorded at cost and are depreciated or
amortized, using the straight-line method, over the estimated useful lives
of the assets.
Buildings 40
Machinery, equipment and other 5-7
Leasehold Improvements various
At June 30, 1999 and 1998 property and equipment consisted of the
following:
1999 1998
---- ----
Land $ 220 $ --
Buildings and improvements 845 --
Machinery, equipment and other 434 5
------ ------
1,499 5
Less accumulated depreciation and
amortization (21) (1)
------ ------
$1,478 $ 4
====== ======
Expenditures for repairs and maintenance are charged against income as
incurred. Renewals and betterments are capitalized.
22
Goodwill -
Goodwill resulted from the excess of cost over the fair value of assets
acquired in the Acquisition (see Note 1) and is being amortized on a
straight-line basis over 25 years.
Long-lived assets -
The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," (SFAS
121). This statement requires a company to review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Future realization of
the Company's property and equipment and intangible assets is dependent
upon the ability of the Company to generate future profitable operating
results in accordance with its operating plans. Based upon management's
evaluations of expected future cash flows, no impairment was indicated.
Earnings per common share -
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). For the
years ended June 30, 1999, 1998 and 1997, Basic and Diluted Earnings Per
Share are calculated as follows:
1999 1998 1997
---- ---- ----
Basic Earnings Per Share:
Numerator
Income (loss) from continuing
operations $(508) $ 91 $(719)
Preferred dividends (233) (126) --
----- ------ -----
Income (loss) from continuing
operations applicable to
common shareholders (741) (35) (719)
Income from discontinued
operation -- 624 732
Gain on sale of discontinued
operation 911 873 --
----- ------ -----
Net income applicable to
common shareholders $ 170 $1,462 $ 13
===== ====== =====
Denominator
Weighted average shares
outstanding 1,226,144 1,151,920 1,100,700
--------- --------- ---------
23
1999 1998 1997
---- ---- ----
Basic Earnings Per Share Per Common
Shareholder
Continuing operations $ (.60) $ (.03) $ (.65)
Discontinued operations -- .54 .66
Gain on sale of discontinued
operations .74 .75 --
---------- ---------- ----------
Net income $ .14 $ 1.26 $ .01
========== ========== ==========
Diluted Earnings per Share:
Numerator
Income (loss) from continuing
operations $ (508) $ 91 $ (719)
Preferred dividends (233) (126) --
---------- ---------- ----------
Income (loss) from continuing
operations applicable to common
shareholders (741) (35) (719)
Income from discontinued operations -- 624 732
Gain on sale of discontinued
operations 911 873 --
---------- ---------- ----------
Net income applicable to common
shareholders $ 170 $ 1,462 $ 13
========== ========== ==========
Denominator
Weighted average shares
outstanding 1,226,144 1,151,920 1,100,700
Minority interest convertible
preferred stock -- -- --
Minority interest convertible
common stock -- -- --
---------- ---------- ----------
1,226,144 1,151,920 1,100,700
========== ========== ==========
24
1999 1998 1997
---- ---- ----
Diluted Earnings per Share per Common
Shareholder
Continuing operations $ (.60) $ (.03) $ (.65)
Discontinued operations -- .54 .66
Gain on sale of discontinued
operations .74 .75 --
---------- ---------- ----------
Net income $ .14 $ 1.26 $ .01
========== ========== ==========
Options to purchase shares of common stock of the Company were outstanding
during the above periods but were not included in the computation of
diluted earnings per share as such inclusion would be anti-dilutive or
because the options' exercise price was greater than the average market
price of the common shares.
For the years ended June 30, 1999 and 1998, convertible preferred stock
and convertible common stock was not included in diluted earnings per
share as such inclusion would be antidilutive as a result of the Company's
loss from continuing operations applicable to common shareholders.
Other comprehensive income (loss) -
Effective January 1, 1998, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Accordingly, the Company has included this presentation as a component of
the statements of changes in stockholders' equity. The objective of the
statement is to report a measure of all changes in equity of an enterprise
that result from transactions and other economic events of the period
other than transactions with owners ("comprehensive income"). This
statement requires that financial statements report net unrealized gains
(losses) as a component of comprehensive income or loss. In accordance
with SFAS No. 130, the consolidated financial statements have been
reclassified for earlier periods.
Use of estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. Marketable Securities:
At June 30, 1999 and 1998, the Company had placed in escrow $709 and $600,
respectively, related to the Put Rights to the former Strouse Stockholders
(see Note 6).
25
The funds relating to the above mentioned arrangements have been invested
in cash equivalents, U.S. Treasuries and corporate bonds. The securities
have been classified as available-for-sale.
Investment securities available-for-sale and cash equivalents relating to
the above escrow arrangements are summarized as follows:
June 30, 1999
---------------------------------------
Amortized Unrealized Gross Market
Cost Losses Value
---- ------ -----
Cash equivalents and
interest receivable $157 $ -- $157
Corporate bonds, maturing
in 1 to 5 years 573 21 552
---- ----- ----
$730 $ 21 $709
==== ===== ====
June 30, 1998
---------------------------------------
Amortized Unrealized Gross Market
Cost Gains Value
---- ----- -----
Cash equivalents and
interest receivable $600 $ -- $600
==== ===== ====
The Company has other funds invested in high-grade corporate debentures.
These securities have been classified as available-for-sale and an
unrealized holding loss of approximately $140 related to these securities
is recorded as a component of stockholders' equity. A total unrealized
holding loss of $161 and $4 is recorded as a component of stockholders'
equity as of June 30, 1999 and 1998, respectively.
Investment securities available for sale other than the escrow
arrangements are summarized as follows:
June 30, 1999
----------------------------------------
Amortized Unrealized Gross Market
Cost Losses Value
---- ------ -----
Corporate debt maturing in:
Less than one year $ 721 $ 19 $ 702
Greater than five years 1,507 121 1,386
June 30, 1998
----------------------------------------
Amortized Unrealized Gross Market
Cost Losses Value
---- ------ -----
Corporate debt maturing in:
Less than one year $ 202 $ -- $ 202
1 to 5 years 871 4 867
26
4. Short-Term Borrowings:
On May 3, 1999, the Company entered into a $5,000 revolving loan agreement
with a bank to finance the Acquisition (see Note 1). Borrowings under the
revolving loan agreement bear interest at 7%. As of June 30, 1999, the
maturity date of this revolving loan agreement was extended to August 31,
1999.
Subsequent to year end, the Company repaid $3,000 of the revolving loan
and refinanced the remaining $2,000 into a seven year term note bearing
interest at 7.7% per annum.
5. Commitments and Contingencies:
Capital lease obligations -
Simulaids entered into a capital lease for computer equipment in January
1999. The outstanding capital lease obligation at June 30, 1999 is as
follows:
Capital lease for computer equipment,
payable in 60 monthly installments
of $2,999, including interest at
8.54% per annum $136
Less: current maturities (25)
----
$111
====
Future capital lease principal payments as of June 30, 1999 are as
follows:
2000 $ 25
2001 28
2002 30
2003 33
2004 20
----
$136
====
6. Preferred Stock:
Series E -
On January 2, 1998, the Company and Geneve Corporation (Geneve)
consummated a transaction which provided for the purchase of 489,131
shares of Aristotle's $.01 par value Series E Convertible Preferred Stock
(Series E), representing approximately thirty percent (30%) of the issued
and outstanding capital stock of Aristotle, for an aggregate price of
$2,250, or a per share price of $4.60. The Series E earns dividends of 8%
per annum and the holders of the Series E are entitled to one vote per
share. Pursuant to the Series E redemption features, the Company is
obligated to redeem all or part of the Series E on January 1, 2002, at
$4.60 per share plus accrued but unpaid dividends. Contemporaneously with
the purchase of the Series E, Geneve purchased 30,000 shares of Aristotle
common stock for an aggregate purchase price of $135.
27
Series F, G & H -
At June 30, 1999 and 1998, the Company had 79,883 and 80,499 shares of
Series F, G and H Preferred Stock (Series F, G and H) outstanding. The
Series F, G and H are entitled to one vote per share with respect to
matters other than the election of directors and auditors. Through January
1, 1999 all holders of Series F, G and H were entitled to dividends of
8.9% per annum. From January 2, 1999 through January 1, 2000, the holders
of 40,250 shares of Series F, G and H are entitled to dividends of 8.9%
per annum.
Pursuant to the Series F, G and H redemption features, the holders may
require Aristotle to immediately repurchase the share at $10 per share
(the Put Right). Accordingly, the Series F, G and H stock has been
reflected as a current obligation in the accompanying consolidated balance
sheets. As a result of the Put Right, Aristotle is required to escrow
certain funds (see Note 3). At June 30, 1999 and 1998, $709 and $600 was
held in escrow resulting from this requirement. If the holders of the
Series F, G and H elect not to redeem this preferred stock they may elect
to convert each share into 1.667 shares of Aristotle common stock, subject
to adjustment as defined.
7. Stockholders' Equity:
The Company had the following common and treasury stock issued and
outstanding at June 30, 1999, 1998 and 1997:
Common Treasury
Stock Stock
----- -----
Outstanding, June 30, 1996 1,105,801 1,287
Purchases of treasury stock -- 6,000
---------- --------
Outstanding, June 30, 1997 1,105,801 7,287
Sale of common stock 30,000 --
Conversion of ASI common into
Aristotle common 33,424 --
Issuance of common stock to directors 39,802 --
---------- --------
Outstanding, June 30, 1998 1,209,027 7,287
Exercise of Options 32,322 (7,178)
Fractional shares (622) --
Purchase of treasury stock -- 7,500
---------- --------
Outstanding, June 30, 1999 1,240,727 7,609
========== ========
28
Aristotle common shares reserved for future issuance consist of the
following:
1999 1998
---- ----
Conversion of Series E 489,131 489,131
Conversion of Series F, G and H
Preferred Stock 133,137 134,163
Exercise of options issued to Former
Strouse Stockholders (Note 9) 35,208 35,208
Exercise of stock options granted
under the Plan (Note 9) 118,429 117,929
Exercise of stock options granted
outside of the Plan (Note 9) 20,000 20,000
------- -------
Total 795,905 796,431
======= =======
8. Income Taxes:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). SFAS 109 utilizes the liability method and deferred taxes are
determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities
given the provisions of enacted tax laws.
At June 30, 1999 and 1998, the principal components of deferred tax
assets, liabilities and the valuation allowance were as follows:
1999
------------------------------
Current Asset Long-term Asset
(Liability) (Liability)
------------- ---------------
Federal net operating loss carryforwards $ -- $ 17,600
State of Connecticut net operating
loss carryforwards -- 100
-------- --------
-- 17,700
Valuation allowance -- (17,700)
-------- --------
$ -- $ --
======== ========
1998
------------------------------
Current Asset Long-term Asset
(Liability) (Liability)
------------- ---------------
Federal net operating loss carryforwards $ -- $ 18,800
State of Connecticut net operating
loss carryforwards -- 100
-------- --------
-- 18,900
Valuation allowance -- (18,900)
-------- --------
$ -- $ --
======== ========
29
A valuation allowance has been recorded for the deferred tax assets as a
result of uncertainties regarding the realization of the asset, including
the lack of profitability to date and the variability of operating
results.
Benefits (charges)for income taxes are comprised of the following for the
years ended June 30, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Current:
Federal $ -- $1,199 $ --
State 89 (17) (32)
----- ------ -----
$ 89 $1,182 $ (32)
===== ====== =====
The 1998 federal tax benefit relates to a tax refund of $1,919 resulting
from a tax loss carryback claim related to its 1996 tax year. In
connection therewith, the Company recorded an income tax benefit of
$1,199, which is net of a $720 reserve which is included in the
accompanying consolidated balance sheets. In addition, upon receipt of
such refund the Company was obligated to pay $480 as a result of a
contingent fee arrangement entered into in connection with this income tax
refund claim. The state tax provisions relate principally to minimum state
and franchise taxes.
At June 30, 1999, without giving consideration to the 1992 carryback claim
(see below), the Company had $51,800 of federal net operating loss
carryforwards which expire through 2011 and $1,000 of state net operating
loss carryforwards which expire through 2001.
Prior to October 2, 1992, Aristotle was the holding Company of First
Constitution Bank (the Bank). On October 2, 1992, the Federal Deposit
Insurance Company (FDIC) was appointed as receiver of the Bank and
Aristotle wrote off its investment in the Bank.
On its return for 1992 as originally filed, the Company made elections
under provisions set forth in regulations proposed by the Internal Revenue
Service in April 1992 as guidance for the application of Section 597 of
the Internal Revenue Code of 1986, as amended and under Section
1.1502.20(g)(1) of the Federal Income Tax Regulations to (i) disaffiliate
from the Bank for Federal income tax purposes and (ii) reattribute net
operating losses of the Bank in excess of $81,000 to the Company. The
application of the tax law with respect to the Company's election to
disaffiliate from the Bank and to reattribute the Bank's net operating
losses to the Company is not certain and, therefore, there is no assurance
that the Company could succeed to any of the Bank's net operating losses.
In September, 1996, the Company filed an amended Federal income tax return
for the year ending December 31, 1992 claiming a worthless stock deduction
of approximately $54,000 with respect to its stock in the Former Bank. As
a result of such amended returns, the Company has also claimed tax refunds
of approximately $10,000 resulting from the carryback of the Company's net
operating loss from 1992 to prior years. Pending final review by the
Internal Revenue Service, the Company has not recorded the $10,000 refund
claim in its consolidated financial statements. After consideration of
such carryback claim, the Company's remaining Federal net operating loss
carryforward related to the worthless stock deduction would be
approximately $32,000 and the Company's aggregate Federal net operating
loss deduction would be reduced from $51,800 to $29,800.
30
The Company's 1992 and 1996 amended returns and carryback claims (see
above) are in the process of being reviewed by the Internal Revenue
Service and there can be no assurance that they will be allowed. In
addition, there is no assurance that the Company will be entitled to any
net operating loss carryforwards arising from, or with respect to, its
interest in the Bank. Even if the Company is entitled to any net operating
loss carryforward arising from, or with respect to, its interest in the
Bank, its ability to utilize such carryforward is dependent upon many
factors.
The Company's ability to utilize tax carryforwards is dependent upon many
factors including, (1) the acquisition by the Company of profitable
investments, and (2) avoiding a fifty percent "ownership change" as
defined in Section 382 of the Internal Revenue Code. If there is an
"ownership change," the tax loss carryforwards available to the Company
would be significantly reduced or eliminated. At a special stockholders
meeting held on April 8, 1994, the stockholders voted to restrict certain
stockholder transfers.
9. Stock Option Plan and Profit Sharing Plan:
During fiscal 1997, the Board of Directors adopted the 1997 Stock Option
Plan, (the 1997 Plan). The 1997 Plan provides for granting up to 150,000
options to purchase shares of Common Stock of the Company. The term of the
options and vesting requirements shall be for such period as the Stock
Option Committee designates.
The Company established a Stock Option Plan in 1986 (the 1986 Plan) which
provided for the granting of nonincentive and incentive stock options to
directors and officers of the Company for the purchase of Aristotle common
stock. Nonincentive stock options and certain incentive stock options
granted under the Plan are generally exercisable after one year but within
ten years as of the date of the grant. Additionally, certain nonincentive
stock options granted under the Plan may be accompanied by stock
appreciation rights ("SAR"). The granting of such stock options (SAR's)
entitles the holder to surrender an option and receive cash equal to the
increase in the fair market value of the common stock from the date of
grant to the date of exercise.
In addition to the options outstanding under the foregoing Plans, the
Company has granted directors and employees of the Company stock options
to purchase 20,000 common stock shares exercisable through December 3,
2004. Also, in connection with the Strouse Acquisition, the Company issued
35,208 options to purchase shares of Aristotle common stock.
In October 1995, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 requires the measurement of the fair
value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to financial statements. The Company
has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No.
25 and elect the disclosure-only alternative under SFAS 123.
The Company has computed the pro forma disclosures required under SFAS 123
for options granted in 1999 and 1998 using the Black-Scholes option
pricing model prescribed by SFAS 123. There were no options granted in
1997. The weighted average assumptions used as of June 30, 1999 and 1998
are as follows:
31
1999 1998
---- ----
Risk free interest rate 4.76% 5.76% - 5.83%
Expected dividend yield None None
Expected lives 5 years 5 years
Expected volatility 69.6% 77.2% - 78.1%
Had compensation cost for the Company's stock option plans been determined
based on the fair value of the grant dates of awards under these plans
consistent with the method of SFAS 123, the Company's income (loss) from
continuing operations applicable to common shareholders would have been
adjusted to reflect the following pro forma amounts as of June 30, 1999
and 1998:
1999 1998
---- ----
Income (loss) from continuing operations
applicable to common shareholders:
As reported $(741) $ (35)
Pro forma $(888) $(135)
Pro forma income (loss) from continuing
operations per common share:
Basic/diluted earnings (loss) per share:
As reported $(.60) $(.03)
Pro forma $(.72) $(.11)
In addition to the pro forma impact on continuing operations shown above,
options were granted to certain employees of Strouse during the year ended
June 30, 1998. The value of such options would have decreased net income
by $117.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
A summary of the status of the Company's stock option plans and other
options as of June 30, 1999, 1998 and 1997, and changes during the years
then ended, is presented below:
1999 1998 1997
------------------ ------------------ -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning
of year 173,137 $6.15 99,137 $15.24 99,637 $15.19
Granted 40,000 5.88 83,000 4.80 -- --
Expired -- -- (9,000) -- (500) 5.45
Exercised (39,500) 4.66 -- -- -- --
------- ------- ------
Outstanding at end of year 173,637 173,137 6.15 99,137 15.24
======= ======= ======
Options exercisable at
year-end 138,637 143,137 99,137 15.24
Weighted-average fair value
of options granted during
the year $3.61 $ 3.21 $ --
32
The following table summarizes information about stock options outstanding
at June 30, 1999:
Options Outstanding Options Exercisable
------------------------------------------ ----------------------
Weighted-
Average Weighted- Weighted
Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable Exercise
Prices 6/30/99 Life Price at 6/30/99 Price
------ ------- ---- ----- ---------- -----
$ 4.63 30,000 101.5 months $ 4.63 15,000 $ 4.63
5.00 10,210 56.5 5.00 10,210 5.00
5.30 2,395 57.5 5.30 2,395 5.30
5.40 20,000 61.0 5.40 20,000 5.40
5.45 24,998 57.5 5.45 24,998 5.45
5.63 15,000 100.0 5.63 15,000 5.63
5.88 40,000 113.5 5.88 20,000 5.88
10.00 27,769 34.7 10.00 27,769 10.00
17.50 958 11.0 17.50 958 17.50
23.75 2,307 11.5 23.75 2,307 23.75
------- -------
$4.63 - 23.75 173,637 6.42 138,637 6.70
======= =======
10. Related Party Transactions:
During the years ended June 30, 1999, 1998 and 1997, the Company paid its
directors $89, $84, and $58, respectively, in compensation for services as
directors of the Company.
Simulaids has entered into a management services agreement with an
affiliate of a stockholder to provide Simulaids with strategic and
operational assistance. As part of this agreement, Simulaids agreed to pay
management fees of $100 per annum. During the year ended June 30, 1999,
the Company recorded approximately $16 of expense as part of this
agreement.
In the ordinary course of business, Simulaids sells its products to an
affiliate of a stockholder. Sales to this affiliate by Simulaids since the
date of acquisition were $92 and accounts receivable from this affiliate
at June 30, 1999 were $11.
33
SIMULAIDS, INC.
FINANCIAL STATEMENTS
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Simulaids, Inc.
We have audited the accompanying balance sheet of Simulaids, Inc. (a New York
Subchapter S corporation) as of April 30, 1999 and the related statements of
income, shareholder's equity and cash flows for the four-month period then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Simulaids, Inc. as of April 30,
1999, and the results of its operations and its cash flows for the four-month
period then ended in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Hartford, Connecticut
September 13, 1999
35
SIMULAIDS, INC.
BALANCE SHEET
AS OF APRIL 30, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 237,068
Trade accounts receivable 391,281
Inventories (Note 2) 933,454
Prepaid expenses and other current assets 147,392
----------
Total current assets 1,709,195
----------
Property, plant and equipment:
Land 61,944
Buildings and improvements 1,020,599
Machinery and equipment 1,298,975
Office furniture, fixtures and equipment 77,401
Computer equipment 243,291
Vehicles 46,164
----------
2,748,374
Less: accumulated depreciation
and amortization 1,557,552
----------
1,190,822
Other assets:
Patent costs, net of accumulated amortization
of $2,877 3,937
Deposits 2,786
----------
Total other assets 6,723
----------
$2,906,740
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Trade accounts payable $ 78,922
Accrued expenses 148,236
Current maturities of capital lease obligation 24,990
----------
Total current liabilities 252,148
----------
Capital lease obligation, net of current maturities 115,056
----------
Commitments and contingencies (Notes 3 and 4)
Shareholder's equity:
Common stock, $1 par value, 2,000 shares
authorized; 100 shares issued and outstanding 100
Additional paid-in capital 5,741
Retained earnings 2,533,695
----------
Total shareholder's equity 2,539,536
----------
$2,906,740
==========
The accompanying notes are an integral
part of this financial statement.
36
SIMULAIDS, INC.
STATEMENT OF INCOME
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
Net sales $ 1,896,860
Cost of goods sold 1,123,012
-----------
Gross profit 773,848
Selling expenses 81,313
General and administrative expenses 374,316
-----------
Income from operations -
manufacturing division 318,219
-----------
Operating loss - video division (2,082)
-----------
Other income (expense):
Interest income 3,420
Interest expense (3,110)
-----------
310
-----------
Income before income taxes
and shareholder's salary 316,447
State income tax provision 7,104
-----------
Income before shareholder's
salary 309,343
Shareholder's salary 77,196
-------